Billion dollar losses expose dangers of leveraged Bitcoin investing

The 30% Bitcoin price crash this week saw many crypto investors lose money. But those who took leveraged bets really felt the pain.

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A Bitcoin symbol sits atop a red question mark, indicating uncertainty over the value of crypto currency

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The Bitcoin (CRYPTO: BTC) price is up 12% over the past 24 hours.

That will come as welcome news to crypto investors, who watched the world’s largest token by market cap tumble more than 30% on Wednesday.

Leveraged investors, in particular, may have noticed a few more grey hairs following the slide. Depending on your gearing level, a fall of 30% can mean you’ve not only lost all of your investment…you’ve lost a lot more.

One Bitcoin is currently worth US$41,711 (AU$53,476).

While that’s well up from the near US$30,000 trough it dipped to on Wednesday, it’s still 19% below the price last Saturday. And well below mid-April’s all-time high of US$64,830.

Why the big price crash?

Analysts are pointing to a number of factors combining to drive the Bitcoin price lower over the past week.

First, the digital token’s skyrocketing price over the 12 months through 14 April this year was already looking overheated and ready for a retrace. Remember, as recently as 15 March 2020 Bitcoin was trading for as little as US$5,300.

Second, the United States Treasury is threatening to wrap all cryptocurrencies in some serious red tape. The Treasury is pressing for businesses to report any crypto transactions in excess of US$10,000. In other words, less than a quarter of one Bitcoin.

Third, and likely the primary driver for this week’s huge crash and subsequent bounce back, is leverage. The big exchanges now offer eye-watering levels of leverage to both institutional and retail investors, sometimes exceeding 100-times your actual investment.

According to Vijay Ayyar, head of Asia Pacific at Luno Pte (quoted by Bloomberg):

What causes such deeper pullbacks are a case of system overload, liquidations, and such factors. Crypto is still a much ‘wilder West’ than any other asset class where you can trade on some exchanges for up to 50-100X leverage. [And] what we’ve seen is a big funding reset across exchanges due to overleveraged traders.

Martin Green, CEO at crypto fund Cambrian Asset Management, added, “The selloff was greatly exacerbated by a lot of leverage. Now that the excess leverage has been liquidated, we have seen longs and leverage starting to be placed once again.”

Justin d’Anethan, sales manager at crypto exchange EQUOS, (run by Diginex) said, “You got all those bearish news and eventually you hit the point where a lot of the leveraged positions were getting liquidated. When that happens, it’s just a cascading fall.”

What’s next for Bitcoin?

No one can say for sure whether Bitcoin will soar to new record highs once more or fall to single digits.

Making the bullish case is Steve Ehrlich, chief executive officer of the cryptocurrency brokerage Voyager Digital (quoted by CoinDesk), “Crypto is here to stay and the volatility we’re currently witnessing is creating an attractive entry point to add to and create new positions.”

Sounding a note of caution is Jean-Marc Bonnefous, managing partner of investment firm Tellurian Capital, “There are definitely still some downside risks left short term, and markets rarely rebound in one single move up. Political noise, with news of tax rules tightening, is still weighing on a prompt recovery.”

Whether you’re bullish or bearish on the outlook for Bitcoin, think twice before making any leveraged bets on the next price moves.

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Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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